Clients often ask me about estate taxes and how their estate may be affected by them. Laws surrounding estate taxes seem to be an ever-changing target and the Federal laws are quite different from those in Oregon. (California has no estate tax at the state level and so residents of California only need to concern themselves with the Federal rules.)

Federal Estate Tax Laws

Contentious political debate has always surrounded Federal Estate Tax (FET) laws, since first set into motion in 1916. It is interesting to note that FET has never produced more than 2% of federal revenues in any given year since World War II. The modern FET was repealed in 2001, with a gradual increase in the exemption amount until it was fully phased out in 2010. However, that legislation “sunsetted” and FET returned in 2011. In 2013, the exemption amount was $5 million per person at a rate of 40%, meaning that the first $5 million of a decedent’s estate would pass FET-free, with any amount over that being subjected to a 40% tax rate. This law had built into it an annual increase in the exemption amount. In December 2017, legislation was signed increasing the exemption amount to $11 million per person, again with annual increases. In 2019, the exemption amount is $11.4 million per person, resulting in only approximately 2,000 people (or 0.0006% of the population) in the U.S. currently liable for FET. This law also “sunsets” and in 2025, FET exemption amount is set to return to the $5 million level, absent any further legislation.

Federal laws surrounding Gift taxes are connected with FET, creating what is called a “unified exclusion.” This means that as a person makes large lifetime gifts, they are eating away at the $11.4 FET exemption amount. As an example, if a person gifts $5 million in assets over their lifetime, their FET exemption is reduced to $6.4 million at their death.

Oregon Estate Tax Laws

Oregon is one of 12 states (plus the District of Columbia) that levies an estate tax. The exemption amount of Oregon’s Estate Tax (OET) is $1 million per person with a graduated rate starting at 10% and capping at 16%. There is no adjustment to the exemption amount, and nothing to suggest that the laws will change any time soon.

Unlike the Federal Laws, there is no unified exclusion connecting Gift and Estate Taxes, and gifting does not affect the OET exemption amount. If someone knows they are about to die, they could gift away their assets before dying to avoid OET.

Estate Planning and Estate Taxes

For couples, revocable trusts can often offer sufficient estate tax planning to avoid most, if not all, estate tax otherwise due at the second spouse’s death (it is usually possible to avoid at the first spouse’s death). Other planning vehicles are available, but they are complex and should not to entered into without great thought and discussion with attorneys, accountants, and financial advisors.

NOTE: For current tax or legal advice, please consult with an accountant or attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.

I am often asked to explain the difference between a probate and a trust administration and why I generally prefer the latter to the former.

Probate is a legal process that takes place after someone dies. It includes identifying and inventorying the deceased person’s property, paying debts and taxes, and distributing the remaining property as the Will directs. If there is no Will, State law will dictate how the assets are distributed.

In Oregon, a probate is triggered if an estate is worth over $200,000 in real property, or $75,000 in personal property. Chances are, if you own a home a probate will be required at your death.

Probates can add unnecessary cost and time. Typically, probates involve paperwork and court appearances by lawyers, resulting in filing fees and attorney fees for drafting the necessary petitions. These fees are paid from estate property, which would otherwise go to those receiving the decedent’s property. It can take 6-8 weeks from the time a decision is made to petition the court to take a particular action and receipt of the signed Order allowing that action, so probates can really slow things down. The result can be frustrating for all involved and more expensive than necessary.

Trusts, on the other hand, can avoid the need for a probate. A Trust is a legal arrangement in which a Settlor transfers property to the Trustee, who holds legal title to the property for a Beneficiary. In a revocable living Trust, the Settlor, Trustee, and Beneficiary are initially the same person, so we are in effect, transferring our property to ourselves to hold and manage for our own benefit. As long as the Settlor is alive and has the legal capacity to make changes, they may amend the Trust as often as they like. At the Settlor’s death, the Trust becomes irrevocable and cannot be changed.

Because legal title to the property is held by the Trust, rather than by the individual, there are no assets in the person’s name at their death and no probate is triggered. This is a subtle, but very important, technicality in avoiding probate. When the Settlor dies, the Trust must be administered, requiring many of the same duties as in a probate such as paying off expenses, debts, and taxes, liquidating assets and distributing the Trust to the remainder beneficiaries. However, because Trust administrations happen outside of court, they tend to be simpler, faster and less expensive than probates.

The Trust only controls what it owns, so it is very important that title to the assets are changed correctly. Anything (other than retirement plans, annuities, and life insurance) remaining in the decedent’s individual could trigger a probate.

Work with a professional who specializes in estate planning so that you are confident the estate plan is comprehensive and fits your needs. A well-crafted estate plan goes far in easing your loved ones stress and ensuring your estate is passed on to them in the most cost- and time-effective manner.